Dollar recovers some strength against yen

WayneMa

NEW YORK (MarketWatch) -- The dollar took back some ground against the yen Tuesday, after investors shrugged off comments from Japanese Finance Minister Koji Omi about risks involved in the yen carry trade.

The trade refers to the borrowing in low-yielding currencies, such as the yen, to reinvest in higher-return currencies and assets, such as the dollar and U.S. Treasury bonds.

The dollar was up 0.4% against the yen at 123.27 compared with a low of 122.79 in overnight trading.

The euro held steady at $1.3461 compared with the day before. The British pound, meanwhile, was perched at $1.9990, near the $2 psychological barrier it breached twice in the past week.

Earlier, the yen rose strongly against the dollar after reports that Japanese officials were concerned about further depreciation of the yen.

The departure of Japanese ministry official Hitoshi Watanabe, who often played down the risks of a weak yen, along with comments from Omi, helped boost the yen as high as 122.79 against the dollar in overnight trading.

Omi said at a news conference Tuesday that investors should be aware of the risks of one-way bets on the yen carry trade.

Most investors, however, saw the comments as "just more political jawboning," said Amarjit Sahota, currency strategist at HiFX. "The underlying fundamentals on the carry remain in place and unless the market sees something more aggressive, it's unlikely to get a full unwinding."

Gains in the yen, however, might be on the horizon as the Japanese election looms near, said Tim Mazanec, senior foreign exchange strategist for Investors Bank & Trust Co. "There's a lot of uncertainty in Japan about whether we'll see a rate hike."

Higher interest rates in Japan would reduce the benefits of the carry trade, by lifting the costs of borrowing yen.

Although the future of Japan's interest rates is anybody's guess, Sahota said the European Central Bank most likely will raise rates by half a percent coming out of the summer to address inflation. The higher differentials in interest rates between Japan and the eurozone likely will lower the risks of the carry trade even more, Sahota said.

Elsewhere, for the second time this year, Russia's central bank allowed the ruble to appreciate 0.5% against its dual currency basket Tuesday, amid concerns over rising inflation and burgeoning capital inflows. See full story.

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